The Burden of Currency Speculation

James Emejo writes on the dangers of currency speculation on monetary policy and the economy, as well as the need for the CBN to checkmate illegal practices

Last week, the financial market was awakened by the news that the Central Bank of Nigeria (CBN) had vowed to send the Economic and Finance Crimes Commission (EFCC) and other security agencies after manipulators of foreign exchange.

CBN Governor, Mr. Godwin Emefiele, specifically pointed out that anyone who fraudulently acquires foreign exchange in the form of Personal Travel Allowance (PTA)/Business Travel Allowance (BTA) from banks, fails to utilise the Fx for the purposes acquired and refuses to return same to the banks within two weeks, would answer to security agencies.

Emefiele, particularly promised that the apex bank would track down and bring the founder of AbokiFx, Mr. Oniwinde Adedotun to book for his speculative activities on the foreign exchange which amounted to economic sabotage and detrimental to the economy.

Currency speculation happens when investors buy or sell currency in the hope of making a profit.

For instance if a currency is pegged at a certain level, and investors believed the currency was overvalued, they would start selling their reserves thereby putting downward pressure on the price.

Experts believed that though this practice is not abnormal in most Fx markets around the world as it could also be positive for an economy, certain speculative tendencies tend to be injurious to an economy.

At a period when there is significant revenue constraints and fluctuation in external reserves, the CBN has had to plough the reserves to be able to defend sustained attacks against the Naira in recent times.

Foreign Reserves Shortage

Currency speculators have often taken advantage of the shortages in foreign reserves to place a bet on the possible movement in exchange rates, fueling round-tripping, hoarding and artificial scarcity.

According to Emefiele, illegal Fx dealers and speculators, “milk the system through speculative information activities on the Naira.”

To curtail speculations, the CBN had in recent times increased its intervention in the Fx market by pumping millions of dollars to all commercial banks as part of efforts to meet the Fx demand for legitimate end users.

This is particularly the case since the apex bank halted the sale of foreign exchange to Bureau De Change (BDC) operators with the resultant impact on the scarce reserves.

Emefiele said currency speculators especially AbokiFx indulged in nefarious and criminal activity on the Nigerian economy by engaging in Fx speculation in contravention of the CBN Act which vested the apex bank with the sole responsibility for determining the rate of the naira.
He said such activities passed as economic sabotage in the country and vowed to fight it frontally.

Aside currency speculation, Emefiele also said that there is evidence that people have deceitfully bought foreign exchange from banks using fake visas and under the pretext of traveling only to cancel their tickets afterwards.

Deceit and Fraud

He cited a particular study, which disclosed that one of the banks sold Fx to 52 people who said they wanted to travel but never did.

“After two weeks they went to check, and 40 out of the 52 have canceled their tickets. How could you have a situation where about 70 per cent or 80 per cent of people who went to a bank to buy BTA on the excuse that they wanted to travel?

“Bank sold to them but they turned back and then went and sold it to black market because they wanted to enjoy the arbitrage.”

Emefiele said such fraudulent means of acquiring foreign exchange will no longer go unpunished adding that the CBN is committed to meeting all legitimate Fx demands in the country.

“However, if you go to a bank with fake ticket, fake visa, fake passport, we have told them not to sell to you. If they sell to you mistakenly because you hoodwinked them to sell to you and after two weeks they checked and found that you canceled your ticket or your visa is fake, they will call you because you are their customer; they have your BVN, they have your number – they will call you to return the dollar.”

“If you do not return it they will place your name on their website, your BVN on their website and we will pick those details and we will send them to EFCC and other crime agencies and they will pursue you, you must return the dollar because you cannot acquire it illegally. That is our position,” the CBN Governor said.

Reducing Risk of Speculation

Analysts believed that while floating exchange rates reduce the risk of speculative attacks as currencies are allowed to be correctly priced by the market, fixed exchange rates represent an arbitrary price that has to be backed up with international reserves whenever it is out of line with its true value.

Accordingly, experts agree that reserves remained the attraction or bounty for speculators.
The CBN currently operates a managed-floating Fx regime where the apex regulator could intervene in the market wherever appropriate.

However, analysts in separate interviews with THISDAY further highlighted the impact of currency speculation on the economy.

Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Abuja Branch, Prof. Uche Uwaleke, said currency speculation was normal in forex markets and indeed all financial markets, adding that it could help create activity and by extension liquidity as bullish and bearish speculators buy and sell with a view to making profit.

According to him, the practice is healthy for currency markets especially where market forces determine the exchange rate.

Uwaleke, however, stressed that there is also destructive speculation, which takes advantage of insider information and market manipulation.

He added that as opposed to constructive speculation, “destructive speculation hurts the economy and in a country like Nigeria, complicates exchange rates management.”

“It is such types that is addressed by strong measures by regulatory authorities. Ordinarily, the provision of authentic information on exchange rates movements should facilitate decision making by economic agents. But when such is intended to manipulate the market, it should be of concern to the monetary authority, “he said.

Also commenting on the issue, the Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said speculative activities on the Naira exchange rate had been one of the major factors that have continuously caused the naira to go continually on the downward trajectory.

“Currency speculation ensures that the market will be dominated by purported rates advised into the market to enable currency traders and buyers alike to maintain a position that is profitable for the speculators even at the detriment of monetary policy and the economy,” Gbolade said.

He noted that this eventually weakens the local currency against major currencies and increase inflationary trends in the economy.

He said: “The CBN recently accused the MD of Aboki FX for currency speculation due to credible information by the bank. When such company or individuals are detected they should be exposed and sanctioned to the full weight of the law to serve as deterrent to others.

“However, the CBN also needs to ensure availability of foreign exchange to adequately service the market demands, because when there is scarcity speculation will thrive.”

On his part, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said speculative activities remained one of the major bane of exchange rate stability and the attendant high rates.

“Speculation causes a supply deficiency and creates artificial scarcity of foreign currencies.

When the CBN through its monetary policy makes efforts to stabilise prices or bring low the exchange rates, the currency speculators will undermine this effort. Speculation also makes people to change their local currency to foreign currencies, thereby causing a demand push situation and once the demand of foreign currency is more than its supply, rates will go up,” Ekechukwu said.

Effectiveness of Monetary Policy

In his comments, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, maintained that currency speculation curtails the effectiveness of monetary policy as the speculators bet against the naira by hoarding Fx rather than utilising it for valid purposes such as foreign trade.

“This further makes Fx scarce and drives the prices up so that those in genuine need for legitimate purposes are left to buy it at a premium. However, it must be said that the disparity between official and parallel market rates also creates an arbitrage opportunity for people to enrich themselves.

“Those that are able to access the FX through official channels can simply resell to the parallel market and make a spread of over N100 to a dollar. That is probably the most lucrative racket in the world currently.”

Analysts further pointed out that FX manipulations tend to impact monetary policy by driving up inflation and distorting efforts by the central bank to stabilise prices,” he said.

Also, writing on “Currency Speculation and Exchange Rate”, Tejvan Pettinger, in a blog believed “floating exchange rates reduce the risk of speculative attacks as currencies are allowed to be correctly priced by the market.”